Comptroller of the Treasury v. Washington National Arena Ltd. Partnership

ADKINS, Judge. The principle issue before this court is whether equipment and ticket stock needed in printing Capital Centre admission tickets are used in the sale or resale of tangible personal property, thus escaping taxation under the Use and Retail Sales Tax Acts. Appellee Washington National Arena Limited Partnership (Washington), operator of the Capital Centre in Landover, ⁴¹⁹ produces computerized tickets for entertainment events there and at other locations. This is done by using blank stock that Washington purchases from an out-of-state vendor and equipment that it rents from Capital Ticket Systems Limited Partnership, a Maryland firm.

This dispute centers on two portions of the assessment that appellant Comptroller of the Treasury levied on Washington for the period from May 1, 1977, through March 31, 1981: $6,265.33 on the purchases of the blank ticket stock and $15,210.00 on the rental charges for the equipment. The hearing officer for the Office of the Comptroller affirmed the assessment as well as statutory interest and penalty. The Maryland Tax Court affirmed the assessment and interest but abated the penalty. The Tax Court reasoned that the rental by Washington of the equipment did not qualify for the Retail Sales Tax Act exemption for manufacturing machinery and equipment found at Art. 81, § 326 (mm) 1 and was not exempt under earlier sections of Article 81 2 because the equipment was not used in “manufacturing, assembling, processing or refining products for sale.” See also Art. 81, § 324(s) (definitional provision of “manufacturing machinery and equipment”) 3 and § 324(d) (definitional provision of “sale”). 4 ⁴²⁰ The Tax Court also denied Washington's claim that the purchase of the blank ticket stock was protected from a tax assessment because it was sheltered by exclusions found at § 324(f)(i) and (f)(iii). 5 The Tax Court found that the blank ticket stock constituted neither tangible personal property used for resale nor part of other tangible personal property used for sale.

Rather, the Tax Court found that when sold to patrons of the Capital Centre, tickets are intangible personal property, thus not qualifying for the § 324(f)(i) and (f)(iii) exclusions. The circuit court reversed, holding that Washington’s tickets are tangible personal property when bought by patrons. Because we hold that the Tax Court’s order was not erroneous as a matter of law, that substantial evidence ⁴²¹ supported it, and that the circuit court judge exceeded the proper bounds of judicial review of a Tax Court decision, we shall reverse. Md.Code Ann. art. 81, § 229(o) provides that a Tax Court order shall be affirmed by a reviewing court “if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record.” When determining if Tax Court orders were based solely upon errors of law, a reviewing court used the “substitution of judgment standard”; but when looking for mistaken factual determinations, a reviewing court must use the narrower substantial evidence standard.

See Comptroller v. Shell Oil Co., 65 Md.App. 252 , 500 A.2d 315 (1985). The first step in our analysis is to determine whether the Tax Court was mistaken in its order as a matter of law. Neither statute nor case law persuades us that the Tax Court committed error. Washington argues that two exemption provisions, § 326(p) of the Retail Sales Tax Act and § 403(a) of the Admissions and Amusement Tax Act must lead to that conclusion. 6 Washington asserts that but for these two exemptions, ticket sales to patrons would be subject to a sales tax, thus providing that tickets are tangible personal property.

The State argues, however, that existence of a “but for” link is questionable, as it certainly is not present for other items listed in the § 326 exemption provision. For example, § 326(f) expressly exempts tax sales which are not ⁴²² within the constitutional taxing power of Maryland. If § 326(f) were eliminated, however, such sales still would be exempt from the sales tax. Section 326(f), even if not strictly necessary, was evidently intended for clarification and emphasis.

It was not error for the Tax Court to decide that the same purposes inform § 326(p) and that theories about the negative implications of § 326(p) are merely speculative. Further, it may be argued that the phrase “sales of tickets” as used in § 326(p) does not refer literally to sales of printed cardboard strips but rather stands for the common notion of sales of permission to enter. Indeed, the phrase can be equated with “amounts charged for admissions,” a concept used in § 405, § 406A, and “receipts from admissions” in § 406C. These three provisions describe exceptional circumstances in which the § 326(p) exemption would not apply.

An analysis of § 403(a) yields the same result. This section imposes a 10 percent cap on the gross receipt tax “provided ... that in those cases where tickets to places of amusement or gross receipts for amusement are taxed under the provisions of the Retail Sales Tax Act or the Maryland Use Tax the total combined admissions tax and sales or use tax shall not exceed ten percent....” The phrase “those cases where tickets ... are taxed” refers to cases that do not qualify for the § 326(p) exemption. Such cases may come under § 406, § 406A or § 406C. Thus, “those cases where tickets ... are taxed” may refer to cases in which tickets are viewed as “amounts charged for admissions” or “receipts from admissions.” Such a reading of § 326(p) and § 403(a) does not inexorably give rise to the inference that tickets are tangible personal property.

Case law also reveals no legal error on the part of the Tax Court. The major Maryland case dealing with the legal status of tickets, Greenfeld v. Maryland Jockey Club of Baltimore, 190 Md. 96 , 57 A.2d 335 (1948) held that a ticket to a place of amusement is merely a revocable license, creating a contract but not an interest in land. Although Greenfeld did not preclude the possibility that tickets ⁴²³ should be viewed as tangible personalty, neither did Greenfeld insist on it. Washington bases its argument on four other cases, but they do not persuade us that this issue has been or should be decided as a matter of law.

In Hearst Corp. v. State Department of Assessments and Taxation, 269 Md. 625 , 308 A.2d 679 (1983), the printing of a newspaper was deemed to be manufacturing but the court based its decision on the common meaning of “manufacturing” and the size and nature of the mechanical operation of appellant’s plant. The issue of the relationship between a physical object (newspaper) and intangible property (information) was one not addressed by that court, yet it is the central issue before this one. In Macke Co. v. Comptroller, 302 Md. 18 , 485 A.2d 254 (1984), paper bowls, plates, cups and lids were determined to be resold to consumers in the same form as the food vendor had acquired them. Without them, the court held, the food and drink they contained would be relatively valueless to consumers.

Macke, then, concerned the relationship between indisputably tangible properties, unlike the situation here. In Comptroller v. Equitable Trust Co., 296 Md. 459 , 464 A.2d 248, 249 (1983), the court held that canned computer programs, tangible magnetic tapes enhanced in value by the intangible information encoded onto them, were tangible personal property. The object of the purchase of a canned program was to use information contained in an ordered sequence of magnetic impulses. As “[a] meaningful sequence of magnetic impulses cannot float in space,” Equitable, 296 Md. at 484 , 464 A.2d 248 , the sequence does not become physically severed from the magnetic tape when used by the consumer.

By contrast, the object of the purchase of an amusement ticket is to view an amusement. The physical act of viewing is accomplished independently from holding onto a ticket, although it is symbolized by one. ⁴²⁴ We are not persuaded that Equitable provides us with relevant law. The trial court judge expressed another reason for excluding the leasing of computer equipment and the purchase of blank ticket stock from taxation: the avoidance of double taxation, a goal that is recognized in Macke. Yet we need not be reluctant to approve the assessment of a sales or use tax upon one taxpayer for one purpose merely because the taxable event involves items that may be central to other taxable events, other taxpayers and other purposes.

We note that Macke, although exempting some paper items from the use tax, also upheld the Tax Court’s finding that utensils, napkins and other products were subject to the use tax to be paid by appellant-vendor. This determination was made even though these products, their cost incorporated into the single price charged for food and drink, were subject to the sales tax paid by consumers. Chief Judge Murphy, in his dissent in Macke, quoted Wilkens Co. v. Baltimore City, 103 Md. 293, 312 , 63 A. 562 (1906) (quoting United States Electric Power and Light Co. v. State, 79 Md. 63, 71-72 , 28 A. 768 (1894), which spoke to the principle involved: [WJhen the same property represents distinct values belonging to different persons, be those persons natural or artificial, both persons may be lawfully taxed, and the amounts of their separate contributions would be fixed by the values which the same property represented in the hands of each respectively. And this would not be double taxation in the sense in which it is obnoxious to the organic law.

Macke, 302 Md. at 38 , 485 A.2d 254 (Murphy, C.J. dissenting). We are left facing, then, what essentially is a factual determination 7 : whether the purchase of an amusement ⁴²⁵ ticket involves the sale of tangible personal property, as that term is used in the Sales and Use Tax Acts. Accordingly, we must invoke the substantial evidence test in making it. Maryland courts have habitually turned to this test when confronted with similar tax related issues.

See, e.g., Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825 , 490 A.2d 1296 (1985) (involving a determination of whether a corporation’s division was entitled to a separate accounting under §